VAT changes in the construction industry…is your business affected?
As of 1st October 2019, the way VAT is collected in the building and construction industry is changing. If you haven’t yet heard of the ‘domestic reverse charge’, or aren’t sure whether it applies to your business, this article is for you.
What is the domestic reverse charge?
The domestic reverse charge represents a major change in the way HMRC collects VAT on building and construction services. From 1st October, instead of the customer paying VAT to the supplier, the customer will have to pay the VAT directly to HMRC. (The customer can recover the VAT via normal VAT recovery rules.)
To illustrate what this means in practice, let’s say a VAT-registered subcontractor supplies painting and decorating services to a VAT-registered main contractor. Previously, the subcontractor would issue an invoice that includes VAT; but under the new rules, they’ll issue an invoice with no VAT, stating that the service falls under the domestic reverse charge. The contractor then accounts for the VAT on their VAT return.
For the subcontractor, this may hit their cash flow hard – many subcontractors have traditionally benefitted from the delay between receiving VAT from the customer and handing it over to HMRC. But contractors may rejoice, since they’ll no longer have to pay out VAT on services and then later recover it.
Who’s affected by the change?
The domestic reverse charge affects all UK VAT-registered individuals and businesses that supply or receive services reported under the Construction Industry Scheme (CIS). It doesn’t apply to zero-rated services, nor does it apply to customers or suppliers not registered for VAT in the UK.
A wide range of construction and building services are covered by the reverse charge. The government has published a full list of services here, or you can check with your accountant whether your service is included. Importantly, the reverse charge applies to the whole service – materials and labour, not just labour.
Making sure you get it right
Whether you’re supplying or receiving construction services, if you’re affected by the domestic reverse charge, it may have a significant impact on your business’s accounting practices and cash flow. At Jupp Castle, we’re working closely with all our CIS clients to prepare for the change and ensure they stay on the right side of the rules. Chat to us about getting your business ready.